Before anyone jumps up and screams: Interest rates stayed very steady throughout the 40's, 50's, 60's, and till the mid 70's before inflation took off and they started rising to meet this new scenario caused basically by the baby boomer's coming into the home ownership market in a big way. Old bankers had a saying "3-6-3". Meaning they bought money from the Fed at 3%, loaned it out at 6% and were on the golf course by 3pm. People stayed in their homes for the entire life of the loan. They hoped the house would be worth the original price when the loan was paid off. People used to have "mortgage burning party" to celebrate out of debt. Greenspan speaks of this average interest rate from time to time and explains that the Fed fund rate is based off of their expectations of "inflation' and the rate in basis points above that inflation number that the Fed wants to maintain. There was little or no inflation till the late 70"s. And, then you throw in deregulation on savings accounts and boom!!! 6% is an average interest rate over the last 50 years. Not necessarily over the last 10 years. SteveD
http://globaleconomicanalysis.blogspot.com/ The Housing Bubble is in its Final Blowoff Stage. The housing bubble is in its final blow off stage with the public "Flipping Houses" just as they flipped equities at the stock market peak in 2000. There are at least two recent books on flipping, and lots of real estate seminars telling people how to "cash in on the boom". Fraud and greed are rampant and when those are combined with enormous public participation, you know the end is at hand. The inventory of houses for sale is rising along with interest rates and warning signals are flashing red in many major US real estate markets. Let's take a look at some of the signs of a blowoff top in the making. Las Vegas Inventory rises and Pulte slashes prices Egged on by the stratospheric prices their neighbors were asking -- and getting -- homeowners in Las Vegas flooded the market with "for sale" signs. The number of existing houses posted for sale on the Multiple Listing Service ballooned from about 1,400 in February to more than 16,000 by October. Among them were never-lived-in homes offered by investors who had bought them only months before from national homebuilders -- who were selling their own brand-new houses literally across the street. In early fall one of those builders, Pulte Homes, took the extraordinary step of slashing prices by $25,000 to $180,000 on more than 20 of its Las Vegas-area developments. The move sent shock waves through the Las Vegas building industry. Florida Speculators abound in Florida condo market Jack McCabe, head of McCabe Research and Consulting in Deerfield Beach, believes about 40 percent of the buyers in the condominium market to be investors, though he said that might be a conservative number. McCabe's surveys show 25,000 condominium units either under construction or planned in Broward, Miami-Dade and Palm Beach counties within the next 18 months. Typically, people only buy about 4,000 or 4,500 condominiums a year in the region. ''Do the math,'' he said. ``I think we're looking at a 3- or 3 ½-year supply coming onto the market in 18 months.'' Cannon, the Integra analyst who is also a real estate columnist for The Herald, said the current buying and building boom could end as badly as one did in the 1980s. Back then, speculators -- including many from Latin America -- helped fuel high-rise construction along Miami's Brickell Avenue. Chicago, Phoenix, Florida Stock market woes induce many to try flipping real estate Flipping is the practice of buying properties for resale, an investment strategy that has become wildly popular in Chicago and across the country. Disappointed with the stock market and dazzled by double-digit property-appreciation rates, amateur investors--apparently of every income stripe--are investing in real estate in droves. They are snapping up everything from condo conversions in Chicago suburbs to new three-bedroom ranch homes in the Arizona desert. Ordinary people, armed with bargain mortgages, pooled family savings and cashed-out home equity, are buying for investment at levels that are starting to worry economic analysts. In some subdivisions up to 60 percent of the owners were investors, which was leaving the regular homeowners in an uncomfortable situation. The market became flooded with rentals." Washington, San Francisco, Florida U.S. real estate: The next bursting bubble? About 30 percent of condominium buyers in Washington and San Francisco and 40 percent in south Florida are obtaining mortgages for investment purposes, says Gregory Leisch, chief executive of Delta Associates, a real-estate research firm. In south Florida, median home prices are rising by as much as 29 percent annually; in southern California, 36 percent; and Las Vegas, 54 percent. That's a sign the market may be overheating, says Stephen Roach, chief economist at Morgan Stanley in New York. "The latest trends in house prices and savings are disturbing," Roach wrote in a Dec. 3 note to clients. "They underscore the distinct possibility that America's asset economy is in the midst of yet another bubble-induced blow-off." Fraud Is Rampant Mortgage Fraud Inflates Housing Bubbles Mortgage fraud is rampant in the United States and not only are the illegal activities an immediate threat to home owners and local communities, the scourge could ultimately cause the kind of economic conditions associated with so-called "housing bubbles." Mortgage fraud complaints more than doubled in 2004. The Federal Bureau of Investigations received 17,127 reports of mortgage fraud in the fiscal year that ended Sept. 30, 2004, compared to only 6,936 reports in the previous fiscal year. Nationwide, mortgage fraud is estimated to have cost businesses nearly $48 billion and consumers about $5 billion in the past five years, according to a recent study by the Federal Trade Commission.
The dilemma the Fed faces is that there are pockets of speculative or near-bubble activity in the real estate market, but in most of the country the market is solid but not overheated. If the Fed raises rates high enough to choke off the speculation, it will put the rest of the country into a recession, with dire consequences for the economy, the federal deficit and possibly political stability. I don't think Greenspan wants that to be his final chapter. There is a saying in the commodity markets: high prices are their own cure. I suspect Greenspan will rely on that, try to jawbone the bubble areas into submission but avoid raising rates so high that the rest of the country suffers.
There's this thread on this site called RE is dead where I mocked many of the posters for such idiocy. One of the stocks I touted there was TOL. Since that thread started homebuilders soared including a double in TOL. Such an easy play. What now? Ya we'll get an airpocket where prices decline, but in the long run, these things are safe and sound.
I think when you are saying "6% is an average interest rate", you're referring to the Fed Funds rate - which would be somewhat correct (5.5-6% is about correct)...this is INcorrect as a reference to mortgage rates - at a 6% Fed Funds rate, your 30 yr. fixed would be in the 8.5% or so. Where do you think real estate will be if we had a normalized 6% Fed Funds rate?? Someone ALWAYS holds the bag...whether things drop in 3 months or 3 years from now...
Here's a typcial post from that RE is dead thread: http://www.elitetrader.com/vb/showthread.php?s=&postid=615034&highlight=DHIs#post615034 From Onewaypockets: "Most of these you mention haven't reported earnings like the ones I posted above. Give it time....especially DHI's continued world record of 108 consecutive quarters of earnings increases. When this POS falls look out." ---- The rest is history.
CEO Of Home Builder Has Heard It All Before "We had a field day in 1995 when mortgage rates went up to 9.1%," he said. Toll Bros. also kept growing in 1997 and 2000, when interest rates were at 8.1% and 8.75%, respectively. --------- Of course on this site its : "Oh my god, someone is gonna hold the bag. Don'tcha know, when rates climb, crash city. Inflation is at 8%. In my years in the homebuilding field, we were stuck with so many empty houses we were giving them away. I'm seeing the same thing but don't ask me, my medication hasn't worn off yet. Doom everywhere!"
from today's news... http://www.hahnscorner.com/ "Last night's news that China may suddenly un-peg the yuan from the dollar caused protective moves in the currency market today. Should have been a big drop in the relative value of the dollar. Bond prices reacted to the news in a rational way, but stocks rallied late in the day in spite of the shifting currency risk. The stock market management is, yet again, another protectionist move. China continues to be forced to buy our long bonds in this situation, distorting that market. The trade deficit of the U.S. is the looming risk to the dollar. Until China un-pegs their currency, Chinese goods will continue to flow in volume to the U.S. And, dollars will flow back to China. It is an unstable and unsustainable situation. Of course, China does not want to relinquish the trade advantage of the currency devaluation. The U.S. cannot tolerate the exploding current account imbalance. China's economic growth is very rapid. Strategic raw materials are needed more than dollars. So, before very long, China will de-peg their currency. Results and reactions are unpredictable, but US dollar denominated securities will be sold in the process. In general, I would expect the Chinese currency to rise and the US dollar to fall, in a relative sense. Very good for commodities. Very bad for stocks. Greenspan will be forced to aggressively raise interest rates to save the dollar from collapse. The interest rate shock will bring on recession." and... http://biz.yahoo.com/prnews/050314/nym232_2.html "China's Currency Policy Leading to Housing Bubble in U.S., Says JBGLOBAL LLC Monday March 14, 3:00 pm ET - Featured in This Week's Barron's OnlineChina's Peg to the Dollar is Distorting Treasury Bond Yields and Keeping Mortgages Artificially Low, Says JBGLOBAL LLC NEW YORK, March 14 /PRNewswire/ -- JBGLOBAL LLC asserts that China's peg to the dollar is causing bond yields to remain at forty year lows which in turn causes mortgage rates to remain artificially reduced. This unnatural reduction in rates is fueling the U.S. housing bubble. An artificial distortion like this occurs when a large and well-heeled buyer makes purchases without regard to any of the typical investment rationales (like price or risk) -- in order to peg a currency, for example. "China must buy our bonds to peg its currency, in order to possess enough dollar-denominated assets to serve as a backstop to the Yuan," maintains James Berman, President of JBGLOBAL. "This gun to their head shanghais them into buying Treasury bonds without regard to our deficits or low yields -- the type of thing a normal investor would care about. The artificial buying of our bonds without regard to price causes our yields to be lower than they would be in a truly rational market," says Berman. James Berman, JD, the founder of JBGLOBAL.COM LLC, a Registered Investment Advisory Firm, specializes in asset management for high-net-worth individuals and trusts. Mr. Berman is a specialist in global investment, asset allocation and modern portfolio theory. As the president of JBGLOBAL LLC, the general partner of an investment fund, Mr. Berman directs a global investment strategy that invests in the United States, Europe and Asia. A frequent lecturer, Mr. Berman is a faculty member in the Finance, Law and Taxation Department of the NYU School of Continuing and Professional Studies. He publishes the JBGLOBAL Macro Compass, an email newsletter for investors. Mr. Berman is regularly published and quoted in a variety of publications, including Barron's and Fortune. He is a graduate of Harvard College and Harvard Law School."